Is Bank of Montreal (BMO) a Strong Buy for 2026? A Deep Dive into Valuation, Earnings Momentum, and Sector Outperformance

The Canadian banking sector has long been a cornerstone of defensive investing, offering stability amid macroeconomic turbulence. Yet, in 2026, the question is no longer whether to own a bank stock but which one to own. Bank of Montreal (BMO) has emerged as a standout candidate, driven by robust earnings growth, disciplined capital management, and a strategic focus on high-margin segments. This analysis evaluates BMO's investment potential through three lenses: valuation, earnings momentum, and sector outperformance, drawing on recent financial disclosures and industry comparisons.

Valuation: A Balancing Act Between Growth and Fair Value

BMO's current valuation reflects a mix of optimism and caution. As of late 2025, the bank trades at a price-to-earnings (P/E) ratio of 12.69, a premium to its historical average but in line with broader Canadian banking peers according to financial modeling data. Morningstar estimates a fair value of C$151 per share, suggesting that BMO's stock is "slightly overvalued" at present levels. However, this assessment overlooks the bank's aggressive capital return strategy. In fiscal 2025, BMO returned over $8 billion to shareholders via buybacks and dividends, including a 5% dividend hike to $1.67 per share. With a Common Equity Tier 1 (CET1) ratio of 13.3%, BMO maintains ample capital to sustain such returns while investing in growth.

The key question is whether the market is pricing in BMO's long-term potential. A P/E of 12.69 implies a discount to its 2025 adjusted EPS of $12.16, which itself reflects a 26% year-over-year increase. If BMO can sustain its earnings trajectory-particularly in its high-growth U.S. operations-its valuation may prove justified.

Earnings Momentum: A Tale of Diversification and Discipline

BMO's 2025 results underscore its ability to navigate a complex macroeconomic environment. Net income surged 19% to $8.7 billion, with adjusted earnings per share rising 26% to $3.28 in the fourth quarter alone. This momentum was fueled by two key drivers: a 100% increase in adjusted earnings from the U.S. banking segment and a 97% jump in capital markets revenue. The U.S. business, now contributing over 30% of total profits, has benefited from lower credit costs and improved net interest margins, reflecting BMO's strategic shift toward higher-quality lending.

Equally impressive is BMO's cost discipline. Despite rising interest rates, the bank managed to expand its net interest income while keeping operating expenses in check. This operational efficiency has propelled its return on equity (ROE) to 11.6% in the fourth quarter of 2025, a marked improvement from 9.8% in 2024 according to financial reports. While this still falls short of BMO's medium-term ROE target of 15% according to Morningstar analysis, the trajectory suggests a path to achieving it, particularly as credit conditions stabilize.

Sector Outperformance: Why BMO Stands Out in a Competitive Field

The Canadian banking sector as a whole has outperformed in 2025, with BMO up roughly 30% year-to-date. However, not all banks are created equal. BMO's outperformance stems from its diversified revenue streams, stronger U.S. exposure, and cleaner credit trends compared to peers like TD and CIBC according to industry analysis.

Consider the contrast with Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD). While RBC remains a high-quality franchise, its valuation is less compelling relative to BMO. TD, meanwhile, is constrained by its reliance on wealth management and insurance segments, which require further growth before it can justify a "buy" rating. CIBC, with its higher exposure to Canadian mortgages, faces greater risk in an environment of elevated household debt.

BMO's U.S. operations provide a critical edge. By leveraging lower credit loss provisions and a more diversified loan portfolio, the bank has insulated itself from some of the volatility affecting its Canadian-focused peers. This strategic positioning, combined with an expanded share repurchase program authorizing 30 million shares, signals confidence in its ability to compound shareholder value.

Conclusion: A Strong Buy for 2026?

BMO's case for a "strong buy" in 2026 rests on three pillars: a valuation that, while currently elevated, is supported by robust earnings growth; a business model that prioritizes diversification and capital efficiency; and a sector-leading position in the Canadian banking industry. While risks remain-such as the potential for a U.S. economic slowdown or rising credit costs-BMO's disciplined approach to risk management and its focus on high-margin segments mitigate these concerns.

For investors seeking a bank stock that balances growth with stability, BMO offers a compelling proposition. As the bank continues to optimize its balance sheet and navigate macroeconomic headwinds, its trajectory suggests that the best may be yet to come.